May 22 2006 12:00AM | Permalink | Email this | Comments (0) |
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The housing slowdown has already become a drag on growth in the rest of the economy and will be the major negative factor in the local economy in every city that experienced soaring home construction volume and home prices in the last two years.

Don’t underestimate how significant this will be. Nationally, residential construction accounted for over 17% of the total growth in the economy last year, expanding more than three times as fast as the rest of the economy. The housing share of growth will fall to near zero this year and next year but will be negative in many of the previously hot housing markets in the Southeast and Southwest.

The housing slowdown will be offset in many parts of the country by the rapid expansion of the rest of the construction market, especially commercial buildings. But this offset will be far short of offsetting the housing decline in Los Angeles, Phoenix, Miami and other boom towns because many of the nonresidential and engineering projects that inevitably follow a housing boom come with a lag of up to several years.

The decline in residential construction employment has already begun. Since peak activity last fall, residential general contractors have laid off 9,000 people after hiring 29,000 in the previous year. Their finishing subcontractors have dropped 39,000 jobs after adding 54,000 in the previous year. That is just the beginning. Real estate and mortgage brokers have stopped hiring since last fall after adding 40,000 jobs in the previous year.

This is good news for labor supply as well as materials and wage costs for nonresidential and engineering contractors. But it is bad news for demand growth in local markets with steep housing construction declines. Many of these laid off workers are itinerant and will quickly leave town. Others will stay in town but earn and spend less money.